It’s far beneath the growth rate required for the economy
and job market to recover. But it’s also probably wrong --
provided that Congress wants it to be wrong. Because the CBO
isn’t saying the economy can’t grow faster than that. It’s
saying the economy won’t grow faster unless Congress makes some
hard decisions, and soon.

The CBO has to do something most of us don’t: Read the laws
as they are currently written and take them seriously. If you do
that, you realize there are a series of fiscal bombs set to go
off over the next year. In a few weeks, for instance, the
payroll tax cut and expanded unemployment benefits are set to
end. On Dec. 31, all of the Bush tax cuts are scheduled to
expire, and the $1.2 trillion automatic sequester from last
year’s Budget Control Act is supposed to begin slicing federal
spending. Many smaller policies are also set to expire or phase
out this year.

Economists call this “fiscal drag.” They mean it literally
-- that fiscal policy is dragging down the economy. In this
case, the fiscal drag is huge. Without it, the CBO estimates a
much rosier few years for the U.S.: growth of about 2.5 percent
in 2012, and 2.75 percent in 2013. Those aren’t amazing numbers,
but they’re a lot better than the alternative scenario.

Adding to Worry

The CBO isn’t the only institution worried about fiscal
drag. In a report released Jan. 24, the International Monetary
Fund warned that, before we even get to the expiration of the
Bush tax cuts and the cuts required by the sequester, fiscal
drag in 2012 will be as high as 2 percent of GDP -- “the largest
annual fall in at least four decades.” This is partly due to the
aforementioned bombs, like the potential end of the payroll tax
cut, but also due to the stimulus bill mostly finishing its
spending in 2011, Congress choosing lower spending levels for
2012 and much else. This drag, they dryly observe, will have
“negative repercussions” for the economy.

But there’s another side to this coin: If we simply let the
fiscal bombs go off -- meaning spending is cut and taxes rise --
the deficit pretty much disappears. The CBO estimates that it
would fall from 7 percent of GDP this year to roughly 1.5
percent over the next few years, one of the fastest reductions
in American history. Conversely, if we defuse all the fiscal
bombs, deficits will remain high -- about 5.4 percent of GDP.

So it seems Congress faces a stark choice between growth
and deficits. Lawmakers can do nothing and watch the deficit
mostly vanish. Or they can act and watch the debt mount.
Happily, the situation is not quite so dire.

Reducing deficits at the expense of growth rarely has the
impact that governments intend. After all, the goal of reducing
the deficit is to reduce borrowing costs. But, as the IMF notes,
“while smaller deficits and debt ratios do lead to lower
borrowing costs, other things equal, advanced economies with
faster output growth are also currently benefiting from lower
spreads.” In other words, the market is more concerned with
growth prospects than it is with deficits, at least for now.

Which makes sense: Deficit reduction is largely impossible
without economic growth. Note the struggles of the U.K., which
has embraced austerity more fully than perhaps any other major
economy, only to see its growth falter and its total debts rise.

Space to Deleverage

The U.S., by contrast, has permitted public debt to rise in
an effort to protect growth. That’s given the private sector
space to deleverage. The result, as the McKinsey Global
Institute detailed in a recent report, is that the total debt
load in the U.S. -- which combines both public and private debts
-- has fallen by 16 percent, leaving the U.S. further along the
painful deleveraging process than any other major economy.

That doesn’t mean the public sector’s deficits should, or
can, be ignored. As the McKinsey study says, history suggests
that recovering from a financial crisis requires a two-stage
deleveraging process: First, the private sector sheds debt while
the public sector adds debt and drives growth, and then the
private sector drives growth while the public sector sheds debt.
But as the IMF notes, American policy, right now, has this
backward: “The risk of too rapid short-term adjustment stands in
marked contrast to the continued lack of progress in clarifying
a medium-term consolidation strategy.”

The right strategy is to make growth the priority over the
next few years while putting in place a credible, clear strategy
for deficit reduction in the years after that. That’s entirely
in Congress’s power. Lawmakers could pass a single bill that
includes a short-term growth component to extend and expand the
payroll tax, invest in public works projects and defuse the
fiscal bombs, and a longer-term deficit reduction component,
perhaps along the lines of the Bowles-Simpson plan, that cuts
the deficit by more than $4 trillion beginning in 2014. What
markets would hear in that case is a commitment to the best of
both worlds: a more robust recovery now, deficit-reduction soon.
That’s much more reassuring than the message markets are getting
now, which is that current U.S. policies are configured to give
us the worst of both worlds, and that Congress is too paralyzed
to change course.

(Ezra Klein is a Bloomberg View columnist and founder of
the Wonkbook blog at the Washington Post. The opinions expressed
are his own.)